Economic Development: the People Problem

An FKD Feature exclusive

It’s easy to see money as the answer to all economic questions. All economic ideas, at some level, relate to money. But economics is about developing sustainable life habits. Money is merely a nice result.

Let’s approach the issue on an international scale: if a nation practices responsible economic policy, its people will accumulate wealth. On a personal level, if an individual thinks “economically,” he or she will probably end up with a sizeable chunk of cash.

Some people take this equation one step further: since economics deals with money, all economic issues can be reduced to getting money into the hands of people who need it.

Money-as-salvation is a popular attitude toward developing countries. What’s the problem? A lack of money. What’s the solution? An influx of money—whether that be through foreign aid or the development of natural resources.

People can take this idea to the extreme: if the wealth of a country increases, they posit, its democratic and peaceful tendencies will increase proportionately. Dictatorship doesn’t last, the argument goes, when you’ve got a vibrant middle class pushing for reform.

This kind of thinking doesn’t just apply to nations. We all have that friend who blames every personal problem on a lack of money—whether that problem is always showing up late, never following through on promises, or being personally undisciplined. Personally, lack of money has been my go-to excuse whenever I don’t eat well or exercise enough (“I’ll get in shape when I can afford a nice gym membership. I’ll eat healthily when I can afford to shop at Whole Foods”).

People Watching

Sometimes, when talking about economics, we miss the bigger picture. Economics isn’t about money; economics is about people. It’s not about putting higher numbers on a spreadsheet or creating a better annual report. GDP growth statistics and a personal bank statements only indicate success because there are people whose lives are purportedly made better on the other side of the numbers.

Unfortunately, sometimes higher numbers don’t help the people they purport to.

Intuitively, having abundant natural resources should increase a country’s growth prospects. Why not? Resources mean revenue, which should mean more money in people’s pockets. After a while, you’d expect oil rich countries to pull themselves out of poverty.

Instead of slowly rising out of poverty, resource-rich, developing countries often face what economist Paul Collier calls the “Natural Resource Trap.” An abundance of natural resources leads to unnaturally high government budgets. Strong budgets can do a lot of good, but are also apt to be harmful for two reasons. First, they allow for corruption, because there’s more money out there to spend on political patronage. Second, they create irresponsible spending, because when revenues aren’t derived from taxation, citizens are not nearly as concerned with where those revenues go. Rather than being a catalyst for change, the windfall gains of natural resources can destroy productive national practices.

Nigeria provides a harrowing example of natural resource development gone wrong. In the early 1980s, Nigeria experienced an oil boom. Oil revenues skyrocketed, and the country was left with an enviable sum of expendable cash. To many people, this probably seemed like a blessing; with all this extra money, the hard times were over.

The hard times weren’t over. Since the 1980s Nigeria has gone back and forth between democracy and dictatorship—with a few economic crises along the way. Why? Corruption played a big part in undermining democracy. The influx of oil, unfortunately, made corruption much easier. It’s just as Collier writes, “Because resource rich countries do not need to tax, they do not provoke citizens into supplying the public good of scrutiny over how their taxes are being spent.”

The Lottery Problem

On the individual level, windfall gains can play the same perverse role. In 1989, Willie Hurt won $3.1 million in the Michigan Lottery. Again, to many people, this seems like an obvious blessing. But it wasn’t: two years later, Willie was divorced, addicted to crack cocaine, and facing charges for murder.

Sadly, Willie’s example isn’t an isolated incident. Intuitively, we might think that getting millions of dollars in one fell swoop would substantially improve our quality of life. Winning the lottery, however, usually makes people miserable. Lottery winners routinely run into problems with debt, bankruptcy, and fraud. Some end up divorced. Others end up committing suicide.

Economic development isn’t about money, it’s about habits. Money is just a byproduct of good habit, and when money disrupts good habits, by encouraging wasteful spending or corruption, it does more harm than good.